a) Airbus makes 50 planes a year, which sell for $50 million each. If Airbus raises its price, Boeing will leave its prices unaltered, so Airbus loses market share. It faces an elastic demand curve. However, if Airbus cuts its price below $50 million, Boeing is forced to match the price cut, so quantity demanded increases only to the extent that additional plane orders are placed when planes are cheaper. Each company faces inelastic demand when it cuts the price. Draw the demand curve that Airbus thinks it faces. (7 marks) b) Suppose the wool industry is perfectly competitive. i) Draw 6 diagrams showing the equilibrium positions of a competitive firm in the short run and in the long-run. (24 marks) ii) Assuming that a single firm is enjoying abnormal profits, draw another diagram to show the effects of the development of artificial fibres that reduces the demand for wool on the firm’s equilibrium position.

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a) Airbus makes 50 planes a year, which sell for $50 million each. If Airbus raises its price, Boeing will leave its prices unaltered, so Airbus loses market share. It faces an elastic demand curve. However, if Airbus cuts its price below $50 million, Boeing is forced to match the price cut, so quantity demanded increases only to the extent that additional plane orders are placed when planes are cheaper. Each company faces inelastic demand when it cuts the price.
Draw the demand curve that Airbus thinks it faces. (7 marks)
b) Suppose the wool industry is perfectly competitive.
i) Draw 6 diagrams showing the equilibrium positions of a competitive firm in the short run and in the long-run. (24 marks)
ii) Assuming that a single firm is enjoying abnormal profits, draw another diagram to show the effects of the development of artificial fibres that reduces the demand for wool on the firm’s equilibrium position.

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